Looking to buy EM equities on weakness

Trevor Greetham

17 July 2018

Global growth may be starting to pick up a little judging by the improvement in economic surprise indicators that compare incoming data to consensus expectations. Citi’s surprise indicators for the US, the UK and Japan are now in positive territory and their eurozone index has recovered by more than half from its lows (chart 1). This improvement bears watching as stronger growth could provide a boost to the more economically sensitive equity markets.

Chart 1: Regional Citi Surprise Index

The emerging markets have underperformed sharply in the last few months due to weaker global growth and a strong dollar, as central banks outside the US stepped back from monetary tightening (chart 2). These markets have also been in the cross hairs of trade war fears.

Chart 2: US dollar index and EM vs World

We are underweight emerging markets in our multi asset funds and our overweight in equities is at its lowest level since 2012. We’d be willing to buy dips over the summer in anticipation of stronger growth going into 2019, however. Interest rates are not at levels that we expect to trigger a sustained slowdown. When the time comes we’d probably focus our buying in the beaten up emerging markets.

Source: RLAM. Tactical positions as of June 2018.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.